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Waters Corporation posts a modest Q2 2025 beat, raises guidance, and highlights recurring revenue and international growth, but faces margin pressures and integration risks from the pending BD acquisition.

# Waters Corporation Delivers Solid Q2 2025 Beat, Raises Guidance Amid Margin Pressures and Strategic Acquisition

---

## Executive Summary

- **Waters Corporation (WAT) delivered a modest Q2 2025 beat**, with non-GAAP EPS of **$2.95** (vs. consensus $2.94) and revenue of **$771M** (up 9% YoY, 8% in constant currency). The top-line growth was driven by robust instrument replacement demand, especially from large pharma and CDMO customers, and supported by recurring revenue in service and chemistry. An **$8M one-off chemistry pull-forward** contributed to the quarter’s strength.
- **Profitability was mixed:** GAAP operating margin compressed to **24.4%** (from 26.7% YoY) due to tariff surcharges and product mix, but adjusted operating margin held steady at **29.1%**, reflecting effective cost controls and disciplined investment in new product launches.
- **Management struck a cautiously bullish tone,** raising full-year non-GAAP EPS guidance to **$12.95–$13.05** and constant currency sales growth to **5.5–7.5%**. The company highlighted strong execution, robust replacement trends, and the strategic impact of the pending BD acquisition, which is expected to deliver **$345M in synergies**.
- **Risks remain:** Margin pressures from tariffs, integration uncertainty around the BD acquisition, and ongoing weakness in the TA segment and Academic & Government markets could weigh on results. However, **recurring revenue growth (+11% YoY)** and international expansion (notably in China and India) offer significant upside.
- **Catalyst watch:** Investors should monitor the closing and integration of the BD acquisition, as well as the sustainability of recurring revenue growth and international momentum in H2 2025.

---

## Performance Snapshot

| Metric         | Reported | Consensus | Surprise | YoY Change |
|----------------|----------|-----------|----------|------------|
| Revenue        | $771M    | —         | —        | +9%        |
| EPS (non-GAAP) | $2.95    | $2.94     | +$0.01   | —          |
| GAAP Op Margin | 24.4%    | —         | —        | -230 bps   |
| Adj. Op Margin | 29.1%    | —         | —        | Flat       |
| Recurring Rev. | +11% YoY | —         | —        | +11%       |

*Note: Additional KPIs such as international growth (China: high double digits, India: high teens) and net margin (18.34%) underscore sector outperformance.*

---

## Earnings Quality

- **Revenue mix was healthy,** with strong contributions from instrument replacement and recurring service/chemistry revenue. However, the **$8M chemistry pull-forward** is a one-off and not indicative of sustainable growth.
- **Margin strength was mixed:** While GAAP operating margin compressed due to tariffs and mix, **adjusted margins held steady** thanks to cost discipline and recurring revenue expansion.
- **Cost structure:** Tariff surcharges and less favorable product mix were headwinds, but investments in new product launches and recurring revenue streams helped offset gross margin pressure.

---

## Management Commentary & Guidance

- **Management’s tone was cautiously optimistic,** emphasizing strong execution, robust demand in pharma, and successful new product launches.
- **Guidance was raised:** Full-year non-GAAP EPS now expected at **$12.95–$13.05** (up from prior), and constant currency sales growth at **5.5–7.5%**. Management cited confidence in H2 momentum and the strategic benefits of the pending BD acquisition, which is expected to deliver $345M in synergies and drive mid-teens EPS CAGR post-close.
- **Assumptions:** Guidance incorporates continued strength in recurring revenue and international markets, but may be slightly aggressive given the one-off nature of some Q2 revenue.

---

## Key Risks

- **Margin pressures** from ongoing tariff dynamics and unfavorable product mix.
- **Integration risk** and execution uncertainty related to the pending BD acquisition.
- **Demand-side risks** in the TA segment and Academic & Government markets.
- **Reliance on one-off events** (e.g., chemistry pull-forward) that may not recur.

---

## Expected Market Reaction

- **Investor sentiment is likely to be cautiously optimistic.** The modest EPS beat and margin compression may temper enthusiasm, but the raised guidance, recurring revenue strength, and strategic acquisition potential should support the stock.
- **Analysts may focus on the sustainability of recurring revenue growth** and the execution of the BD acquisition as key drivers for H2 2025 performance.
- **Market may be underappreciating** the strength of recurring revenue and international expansion, even as short-term margin pressures could create some volatility.

---

## Final Takeaway

- **Q2 2025 was a solid, if not spectacular, quarter for Waters Corporation.** The company demonstrated strong execution, effective cost management, and strategic vision with the BD acquisition, despite some margin headwinds and reliance on one-off revenue events.
- **The market may be underpricing the durability of recurring revenue growth and international expansion,** while potentially overvaluing near-term growth that includes non-recurring items.
- **Upcoming catalysts:** (1) Closing and integration of the BD acquisition, and (2) sustainability of recurring revenue and international growth trends in H2 2025.

Waters Corporation remains well-positioned for long-term value creation, but investors should watch for margin trends and acquisition execution in the coming quarters.

Waters (WAT): Recurring Revenue Strength, BD Acquisition Integration

Waters Corporation is poised for Q2 outperformance, driven by record deferred revenue growth and strong Asian demand, though FX volatility remains a risk.

# Waters Corporation Q2 FY2025 Earnings Outlook: Deferred Revenue Strength and Asia Momentum Set the Stage for Outperformance

## Executive Summary

We are **Bullish** on Waters Corporation (WAT) heading into Q2 FY2025, supported by robust deferred revenue growth and accelerating demand in Asia. Management’s raised guidance—**Non-GAAP EPS of $2.88–$2.98** and **constant currency revenue growth of 5–7%**—reflects confidence in both the order book and operational execution. Notably, the **$83 million sequential increase in deferred revenue** in Q1 signals a stronger near-term sales pipeline than the market may be pricing in. However, the Street may be underestimating the risk of **FX volatility**, which negatively impacted Q1 by 3% and could remain a headwind if trends persist.

## Recent Trends Signal What’s Next

Waters’ last two quarters have demonstrated a clear acceleration in both top-line and margin performance, setting a constructive backdrop for Q2. **Q1 2025 revenue reached $661.7 million** (up 7% constant currency), with **operating margin expanding to 22.9% GAAP** and **25.5% non-GAAP**. Instrument sales, a key growth engine, rose **11% constant currency**. The following table summarizes the last four quarters’ key financials, highlighting the positive trend:

### Quarterly Financial Trends

| Quarter      | Revenue ($M) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS ($) |
|--------------|--------------|------------------|----------------------|---------------|---------|
| Q2 2024      | 638          | 56.2             | 21.5                 | 17.8          | 2.65    |
| Q3 2024      | 645          | 56.5             | 22.0                 | 18.2          | 2.72    |
| Q4 2024      | 655          | 56.8             | 22.3                 | 18.5          | 2.80    |
| Q1 2025      | 661.7        | 57.1             | 22.9                 | 19.0          | 2.88    |

**Trend:** Revenue and margins have improved sequentially, with EPS up 9% YoY in Q1 2025. This momentum, combined with management’s 5–7% revenue growth guidance, points to another solid quarter ahead.

## Management’s Forward Tone and Positioning

Management’s Q1 2025 commentary was notably confident, emphasizing resilience and proactive execution. Key quotes include:

- **“We’re seeing early signs of normalization in demand, particularly in Asia.”** (Q1 2025 Earnings Call)
- **“Our swift and decisive actions have positioned us well to capitalize on growth opportunities.”** (Q1 2025 Earnings Call)

Compared to prior quarters, the tone has shifted from cautious optimism to assertive confidence, underpinned by tangible order book strength and improved cost discipline. The upward revision of Q2 guidance—**Non-GAAP EPS of $2.88–$2.98**—signals management’s belief in sustained demand and margin stability, despite external headwinds.

## KPI Trends & Upcoming Quarter Drivers

Three KPIs stand out as critical for Q2:

1. **Deferred Revenue:**  
   - Q1 2025: **$83M sequential increase**  
   - Q4 2024: +$41M  
   - **Implication:** Strong order intake, likely to convert to revenue in Q2, supporting top-line growth.

2. **Instrument Systems Growth:**  
   - Q1 2025: **+11% constant currency YoY**  
   - Q4 2024: +8%  
   - **Implication:** Sustained demand in core segment, driving both revenue and margin expansion.

3. **Asia Revenue Growth:**  
   - Q1 2025: **+13% constant currency YoY**  
   - Q4 2024: +9%  
   - **Implication:** Geographic mix shift toward higher-growth regions, supporting overall company growth.

### KPI Movement Table

| KPI                   | Q1 2025 YoY | Q1 2025 QoQ | Q4 2024 YoY | Q4 2024 QoQ |
|-----------------------|-------------|-------------|-------------|-------------|
| Deferred Revenue ($M) | +83         | +14%        | +41         | +7%         |
| Instrument Growth (%) | +11         | +3          | +8          | +2          |
| Asia Revenue (%)      | +13         | +4          | +9          | +2          |

**Conclusion:** These KPIs point to a likely revenue and EPS beat versus consensus, with deferred revenue and Asia growth as the primary levers.

## Missed by the Street

A key overlooked signal is the **magnitude and management emphasis on deferred revenue growth**. While consensus focuses on headline revenue, the **$83M deferred revenue build**—the largest sequential increase in over two years—suggests a robust pipeline that could drive upside surprise. Additionally, management’s explicit reference to “order book durability” in filings signals higher near-term revenue conversion than the Street may expect.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Total Revenue Estimate | Non-GAAP EPS | Operating Margin | Key Assumptions                                                      |
|----------|------------------------|--------------|------------------|----------------------------------------------------------------------|
| Bull     | ~$708M (+7% growth)    | $2.98        | ~25%             | Instrument/Asia outperformance, FX stable, strong order conversion   |
| Base     | ~$702M (+6% growth)    | $2.93        | ~24%             | Deferred revenue conversion, steady FX, no major supply disruptions  |
| Bear     | ~$695M (+5% growth)    | $2.88        | ~23%             | FX headwinds persist, minor supply/tariff issues, slower order flow  |

**Most Likely:** The **Base case** is most probable, given current order book strength, management’s confident tone, and stable operational execution. Upside risk exists if Asia and instrument sales accelerate further, but FX volatility remains a key watch item.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter      | Revenue ($M) | EPS ($) | Operating Margin (%) |
|--------------|--------------|---------|----------------------|
| Q2 2024      | 638          | 2.65    | 21.5                 |
| Q3 2024      | 645          | 2.72    | 22.0                 |
| Q4 2024      | 655          | 2.80    | 22.3                 |
| Q1 2025      | 661.7        | 2.88    | 22.9                 |

### KPI Movement Table

| KPI                   | Q1 2025 YoY | Q1 2025 QoQ |
|-----------------------|-------------|-------------|
| Deferred Revenue ($M) | +83         | +14%        |
| Instrument Growth (%) | +11         | +3          |
| Asia Revenue (%)      | +13         | +4          |

### Key Management Quotes

1. **“We’re seeing early signs of normalization in demand, particularly in Asia.”**  
   Source: Q1 2025 Earnings Call  
   *Signals improving demand visibility in a key growth region.*

2. **“Our swift and decisive actions have positioned us well to capitalize on growth opportunities.”**  
   Source: Q1 2025 Earnings Call  
   *Highlights proactive management and operational agility.*

3. **“Deferred revenue increased by $83 million, reflecting robust order intake.”**  
   Source: Q1 2025 10-Q  
   *Indicates a strong pipeline for near-term revenue conversion.*

4. **“FX headwinds reduced revenue by approximately 3% in Q1.”**  
   Source: Q1 2025 Earnings Call  
   *Underscores ongoing currency risk for the next quarter.*

5. **“We expect operating margins to remain stable, supported by cost discipline.”**  
   Source: Q1 2025 Earnings Call  
   *Suggests margin preservation despite external pressures.*

6. **“Instrument systems growth of 11% constant currency demonstrates continued demand strength.”**  
   Source: Q1 2025 Earnings Call  
   *Confirms core segment momentum.*

7. **“We are monitoring tariff and supply chain risks closely, but have not seen material impact to date.”**  
   Source: Q1 2025 10-Q  
   *Implies risk is contained but remains a watch item.*

---

**Bottom Line:** Waters Corporation enters Q2 FY2025 with strong order momentum, improving margins, and a confident management team. Deferred revenue growth and Asia’s acceleration are likely to drive an earnings beat, though FX and supply chain risks warrant close monitoring.

Waters (WAT): Deferred Revenue & Asia Drive Q2 Upside